Our recent discussion with management reinforces our view of still challenging times ahead for the luxury watch retailer as sales weakens and rentals creep up again. Maintain HOLD with a fair price of S$0.65.

Between softening sales and higher start-up expenses for new boutiques, The Hour Glass (THG) is caught in a near-term jam, in our view. We recently caught up with its management and received insights on the financial year ahead, a preview of rental expenses this year in view of the opening of two new boutiques in Singapore this July, and how they are looking to manage margin pressure against a challenging backdrop.

Downbeat on IR impact. Management is of the view that there is still uncertainty surrounding a full recovery and that consumers are still cautious on discretionary spending with no visible pick-up in the retail segment at present.

Rental expense is a bugbear. The leases for THG’s three new boutiques were all signed in 2007 when retail rentals were at their peak. Other leases that are up for renewal this year will be subject to rising rentals, offering no reprieve to the situation.

Managing margin pressure in tough times. THG will focus its efforts on controlling end-consumer discount, an area where sales staffs hold a high degree of discretion by implementing profit-sharing schemes rather than abiding by traditional commission structures.

Maintain HOLD, fair price unchanged at S$0.65. Notwithstanding THG’s strong balance sheet, the luxury retail business is vulnerable to weak consumer sentiment and discretionary spending cuts. Maintain HOLD with a fair price of S$0.65, based on 0.8x P/B.